TY - JOUR
AU - Philippon,Thomas
AU - Midrigan,Virgiliu
TI - Household Leverage and the Recession
JF - National Bureau of Economic Research Working Paper Series
VL - No. 16965
PY - 2011
Y2 - April 2011
DO - 10.3386/w16965
UR - http://www.nber.org/papers/w16965
L1 - http://www.nber.org/papers/w16965.pdf
N1 - Author contact info:
Thomas Philippon
New York University
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
Tel: 212/998-0490
Fax: 212/995-4233
E-Mail: tphilipp@stern.nyu.edu
Virgiliu Midrigan
Department of Economics
New York University
19 W. 4th St.
New York, NY 10012
Tel: 212/992-8081
Fax: 212/995-4186
E-Mail: virgiliu.midrigan@nyu.edu
AB - A salient feature of the Great Recession is that regions that experienced larger declines in household debt also experienced larger declines in employment. We study a model in which liquidity constraints amplify the response of employment to changes in debt. We estimate the model using panel data on consumption, employment, wages and debt for U.S. states. Though successful in matching the cross-sectional evidence, the model predicts that deleveraging cannot, by itself, account for the large drop in aggregate employment in the U.S. The 25% decline in household debt observed in the data leads to a modest 1.5% drop in the natural rate of interest, and is easily offset by monetary policy. Household deleveraging is more potent, however, in the presence of other shocks that trigger the zero lower bound on interest rates. In the presence of such shocks household deleveraging accounts for about half of the decline in U.S. employment.
ER -